#138 Groupon in China. No longer in the company of distinguished friends.

In February 2018, Chinese company Meituan became the world’s fourth most valuable startup. Meituan, now valued at $30 billion, originally started as a group purchasing platform, similar to Groupon, which had its stab at the Chinese market. Yes, Groupon. Let’s turn the clock back for a moment.

In mid 2011, American publication Forbes asked, “Can Groupon Succeed in China“? Apparently, only a few months after Groupon’s start in China, the media already saw coming what was unavoidable. Groupon entered China in early 2011. At that time, people at Groupon, but also the media must have assumed that the Chinese market was ripe for a proven, internet-based group purchasing platform. China’s internet population had grown to half a billion users, and its collective culture combined with the desire to drive a good bargain, seemed to be an ideal fit for Groupon’s model. Tech publication Venture Beat agreed: “China doesn’t kill foreign companies, foreign companies commit suicide in China”, so the author of a commentary, suggesting that Groupon could actually find its path to success in China. Groupon entered big – 3,000 employees in about 70 offices across China seemed to spell success. For a short time, at least. But then things deteriorated fast. In the very beginning, Groupon experienced several operational glitches that didn’t bode well for them. To begin with, one of Groupon’s local competitors owned the Chinese domain Groupon.cn forcing Groupon to adopt a Chinese name, “Gaopeng” for its China business. Then, after briefly being live for only a few hours during their launch, Gaopeng’s site went dark again. According to local regulators, the site didn’t possess a necessary license.  And then came Groupon’s American Superbowl ad whose cultural insensitivity was simply mind boggling. The ad, a completely misguided spoof managed to infuriate both parties on the side of the China-Tibet issue. It didn’t exactly help to raise Groupon’s standing in China. By mid-2011, only a few months after the launch, there were already dozens of competitors, and despite all efforts and significant investments, Gaopeng came in only 10th in terms of deal volume. By August 2011, Groupon had closed 13 of its  offices and fired hundreds of employees in successive rounds of layoffs. Groupon simply made the same mistakes that many foreign entrants make in China. To begin with, they almost exclusively hired foreign managers to run their China operations, and ignored the importance of local talent. To make things worse, they hired consultants and investment bankers with MBAs instead of sales- and growth focused minds. Driven by the need for speed and efficiency, they imported tactics that had worked in the US and other markets with a total disregard for local consumer behavior. For instance, Groupon engaged in mass email marketing, ignoring the fact that Chinese consumers prefer instant messaging over email. Most importantly, Groupon completely ignored the competitive environment. When they entered China, competition in the group purchasing segment was already highly fragmented. This resulted in vendors having the upper hand and laughing at Groupon’s insistence to take 50 percent of the profits. Commissions ultimately came in at just about 11 percent. In the first 9 months, Gaopeng had accumulated losses of close to $50 million on revenue of only $2 million. By 2012, Groupon started to quietly slip away and withdraw from China.

To their credit, when Groupon first entered they understood that they needed a Chinese partner, and they went with Chinese Internet giant Tencent. Unfortunately, the two partners had differences over strategy: Groupon wanted to grow fast to increase the company’s valuation for its upcoming IPO, while Tencent had an interest in sustainable growth tactics. Groupon clearly saw Tencent only as a door opener and investment partner, but never considered asking them for strategic guidance on the Chinese market. They just knew better…! Eventually, Tencent turned their backs on the Americans and focused on companies that were direct and indirect competitors of Gaopeng.

Here’s a fun fact at the end: “Gaopeng” is a part of the Chinese proverb “gaopeng manzuo”, which roughly translates into “being in the company of distinguished friends”. There’s nothing distinguished about Groupon’s China entry. And it doesn’t have friends there anymore either…

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